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Superfunds April 2016
The rising tide of insurance premiums is placing superannuation
funds in a challenging position with some funds potentially at
the cross roads of insurance affordability.
The recent headwinds in group insurance markets are resulting in
many superannuation funds experiencing large premium increases within
their group life and income protection offerings. For the most part, these
premium increases have been precipitated by a perfect storm comprising of
adverse claims experience, increased capital requirements, a low investment
return environment from the insurer’s perspective and a rise in member
engagement and plaintiff law firm involvement from the fund’s perspective.
This is reflected in the sample analysis based on publicly available product
disclosure statements for large industry funds, which show average default
death and total and permanent disability (TPD) premium increases to be
between 30 per cent and 50 per cent during the period 2013 to 2015. The
majority of these increases have been driven by TPD, which has seen very
poor claims experience. Group insurers have reported that experience for
voluntary cover has been worse than for default cover.
While it is expected that the broader superannuation industry will continue
to see premium increases as rate guarantees end and insurers update pricing,
there are signs of stabilisation in the market and insurer profitability. This
is a consequence of significant premium increases in prior years and some
tightening of TPD definitions and other terms and conditions.
THE AFFORDABILITY CONCERN
Under Section 52(7)(c) of the Superannuation Industry (Supervision) Act
1993 (SIS Act), trustees are required “to only offer or acquire insurance of a
particular kind, or at a particular level, if the cost of the insurance does not
inappropriately erode the retirement income of beneficiaries”.
Trustees must now supplement historic considerations about
underinsurance and inadequate levels of cover with concerns surrounding
insurance affordability and deterioration of member balances.
Group insurance is also being targeted by the regulator APRA, who is
placing more emphasis on insurance design to ensure sustainability and
appropriateness for fund members. APRA’s 2015 Annual Report says that
“APRA remains of the view that modernisation of benefit design and
definitions is a critical aspect of developing sustainable group risk products”.
QUANTIFYING AFFORDABILITY
The concept of affordability in insurance and the level of premiums that will
not unduly erode the retirement income of members requires an element
of subjective judgement. Two metrics that funds can use to measure
affordability include assessing a member’s premium as a percentage of their
account balance and as a percentage of their annual contributions.
Figure 1: Notable group insurance premium increases (2013-2015)
200%
150%
100%
50%
0%
- 50%
Average
2015
11 industry funds
2014
18 industry funds
2013
17 industry funds
Source: Willis Towers Watson.